What's the Difference Between Bitcoin and Ethereum?

Ever since it was first launched in 2009, Bitcoin has been spawning legions of imitators. Many are exact clones of Bitcoin. Others have improved and refined some aspects of Bitcoin's design.

If the recent Bitcoin hype has compelled you to investigate cryptocurrency, the coin you've probably heard mentioned most often is Ethereum.

While it trades at a much lower US dollar value than Bitcoin, Ethereum is by far the second most valuable cryptocurrency. It also has the second largest market cap. Only Bitcoin attracts more hype and headlines.

Ethereum has built its reputation by offering something fundamentally different than Bitcoin. Bitcoin and Ethereum may both be cryptocurrencies but that's where the similarities end.

Smart Contracts, Use Tokens and ICOs: Ethereum's Killer Apps

Slow transaction times and high fees have harmed Bitcoin's intended function as an alternate form of currency. With its value soaring, Bitcoin has instead become attractive as a speculative investment and a store of value.

Ethereum's price has steadily increased since launch for similar reasons. However, Ethereum has surged ahead of other cryptocurrencies because it has the power to be so much more.

Initial coin offerings (ICOs) have drawn huge amounts of investment and press coverage over the last year. ICOs operate similarly to initial public offerings (IPOs), where the public are invited to buy shares in an established company for the first time.

Unlike IPOs, ICOs typically take place long before a company has turned a profit. Instead, companies issue white papers outlining their plans for future revenue generation.

Investors then buy tokens which can only be used within this company's platform, hoping that the tokens increase in value as the platform becomes more popular.

At this point, ICOs are the biggest thing that Ethereum's underlying smart contracts system has made possible. New companies with innovative ideas have been able to generate hundreds of millions of dollars by issuing ICOs using Ethereum.

However, ICOs are just the tip of the iceberg. Ethereum-enabled smart contracts have the power to revolutionize almost every industry.

How a Smart Contract Works

A smart contract is a self-executing contract that automatically honors an agreement when the conditions underlying it have been met. For example, if you hire somebody to deliver a package for you, the smart contract would hold your payment in reserve while you wait for the package to be delivered. As soon as the package has reached its destination, the funds would automatically be released to the delivery driver.

Using Ethereum-based smart contracts for these types of interactions is a neat innovation, but using smart contracts for fully automated processes could be revolutionary.

Residents in Brooklyn, New York have already experimented with using smart contracts to control their energy grid. Apartments in one neighborhood affixed solar panels to the roofs.

Smart meters inside the apartments then automatically monitored energy consumption within homes and the supply from the solar panels. Without any human intervention, this innovative energy solution exchanged excess energy for money held in tenants pre-paid accounts.

When combined with the Internet of Things (IoT), the possibilities for Ethereum-based smart contracts are staggering. Imagine self-refilling refrigerators or seamless parking in smart lots and garages. There is almost no industry or process that smart contracts can't make more efficient and easier to use.

Scalability

Scalability has become a huge flashpoint in the Bitcoin community in recent months. There were controversy and disagreement over whether the Segwit2x hard fork should be implemented. For those out of the loop, Segwit2x was an attempt to improve Bitcoin transaction times.

The biggest barrier to Bitcoin becoming a usable currency is the incredibly slow transaction speed, which at busy times makes it impossible to use Bitcoin for everyday purchases. You might, therefore, assume anyone who's invested in Bitcoin would want to see transactions sped up.

However, the only way to fundamentally alter Bitcoin's design is to split the currency in two, creating a new coin which implements the desired improvements. This is known as a hard fork. Many Bitcoin backers are opposed to hard forks because they see them as damaging to Bitcoin's brand and reputation.

Ethereum has seen far less acrimony when improvements have been deemed necessary. Ethereum was also introduced long after Bitcoin. Ethereum's creator Vitalik Buterik learned from Bitcoin's shortcomings and created a much more malleable blockchain platform.

Ethereum rolls out major updates semi-regularly with little controversy. The only time a contentious hard fork has split the currency was when $50 million of Ether was stolen.

A hard fork was used to quarantine the stolen Ether within a smart contract and return it to its original owners. This resulted in the off-shoot Ethereum Classic cryptocurrency, created by Ethereum backers who were fundamentally opposed to splitting the blockchain for any reason.

Conclusion

Ethereum has been designed with an entirely different purpose in mind than Bitcoin. Just as with Bitcoin, Ethereum's innovative nature has spawned many copycats.

Some of these are large-scale projects with a lot of upside, such as the Chinese coin Neo. Many others are likely to become completely worthless in the near future.

It is therefore impossible to make value judgments between Bitcoin and Ethereum and say that one is better than other. It's like asking if reading is better than playing tennis.

Both may be based on similar blockchain-enable technology, but they are entirely different products serving entirely different needs.

I’ve been teaching Economics for high school students, mostly focusing on personal finance. I also have a good basic understanding of economics from several economics classes during my university studies.